Debunking the Smallest Salable Unit Theory

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Richard Stark, Jul 24, 2015

Manufacturers of devices such as smartphones need licenses to intellectual property held by innovators. Naturally, as profit-maximizing entities, they prefer to acquire the licenses they need at the lowest possible cost—that is, for the smallest royalty payments, or even royalty free. To achieve this goal, companies favoring low or no royalties are busily advocating a number of legal theories and policy changes around the globe.

One of their favorites is the argument that royalties must be based on the “smallest salable patent-practicing unit” (“SSPPU”), that is, the smallest component in a multicomponent device that practices a patent. The SSPPU theory arose out of a few cases set in a very particular context: U.S. jury trials in actions brought by non-practicing entities (sometimes referred to as “patent trolls”) on a single or small numbers of patents. The theory was developed to offset a perceived tendency of jurors to overestimate reasonable royalties that might be agreed to in hypothetical negotiations. But now the proponents of low royalties or no royalties (generally device makers and their allies) eagerly seek to convert that narrow concept into a mandatory limitation on the freedom of real-world commercial negotiators of licenses to patent portfolios that include standard-essential patents (“SEPs”).

The most notable example of this trend occurred earlier this year when the device-maker lobby caused the IEEE to adopt changes to its patent policy that endorse SSPPU-based licensing for patents declared essential to IEEE standards. An advocacy piece for the device makers’ argument recently appeared in this journal.

Whatever the merits of the SSPPU theory might be in the jury-trial context in which it arose, it plainly cannot apply in portfolio licensing of SEPs. The device makers’ arguments on this front fail to comport with (i) the applicable law, (ii) the relevant facts, and (iii) important practical considerations.

Their argument, in essence, is as follows: (1) FRAND licensing is not working, (2) the SSPPU theory is the proper and settled rule for determining patent infringement reasonable royalties in all cases, and (3) the SSPPU theory should therefore apply to SEP portfolios. Each link in this chain is mistaken. This article addresses these flaws in the context of the cellular communications industry.